Question: 1. Which specific asymmetric information problem do credit-rating agencies help to reduce in the bond market? Explain the effect of subprime mortgage crisis on the

1. Which specific asymmetric information problem do credit-rating agencies help to reduce in the bond market? Explain the effect of subprime mortgage crisis on the trust worthiness of these agencies on the quality of information.

2. You are in the market for a used car. At a used car lot, you know the blue book value for the cars you are looking at is between $20,000 and $24,000.

A. If you believe the dealer knows as much about the car as you know, how much are you willing to pay? Why? Assume that you care about the expected value of the car and the car value are symmetrically distributed.

B. Now you believe the dealer knows more about the car than you. How much are you willing to pay? Why?

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